Thursday, 20 August 2015

Impact of weak ringgit on auto industry - then and now


The Ringgit began to rapidly devalue upon the onset of the Asian financial crisis in July 1997 by some 50% from its original value of that time, which was RM 2.50 to a US Dollar.
The crisis was attributed to the role played by currency speculators. The currency than remained erratically fluctuating between RM3.80 and RM4.40 to a US Dollar leading to the government’s decision to peg the Ringgit, in September 1998, at RM3.8 to a US Dollar, thirteen month after the crisis began.
The de-pegging of the Ringgit in 2005 has resulted in the currency to steady appreciate almost immediately.
Fluctuations do occur from time to time, but the appreciation curve continued and settled at RM3.05 to one US Dollar as at September 2014.
It was at the same time that the global crude oil price began to cascade downward at a constant rate from slightly below USD100 down to the lowest value of about USD45 per barrel in February 2015.
The price began to erratically pick up and leveling at USD60 per barrel from April to the end of June 2015.Beginning July, the price again began to slide to the current value of about USD42 per barrel.
A simple analysis on the profile of oil prices against the values of ringgit from September 2014 to date clearly shows that the value of Ringgit was closely on same trail with the global oil price, where Ringgit devalues as the price of oil drops and visa-versa.
The effect of the 1997 financial meltdown on the local business community was devastating plunging the country into recession. The manufacturing sector shrunk by 9% and automotive industry was badly affected.
Prior to the 1997 Malaysia economy was enjoying a significantly high growth rates and the automotive industry in particular was rapidly expanding.
Massive investments on capital assets were on-going in pursue of the growing capacity requirement by the industry.
As the local industry is dependent on imported capital assets, all investments were made on financial borrowings in US Dollar.
The onset of the financial crisis has devastatingly affected the investments rendering many of the automotive companies to suffer huge debt as the Ringgit devalued.
The situation was bad mainly due to the fact that most local automotive parts and components producers were only dependent on local market with very little export activities.
While earnings were in Ringgit their debt financing were in US Dollar, rendered their cash flow deficit tremendously.
The current Ringgit devaluation is bearable relative to the 1997 episode as most of the local automotive players are established having amortised most of their assets and are very prudent in their investment ventures.
However, procurement of raw materials, parts and components and manufacturing tooling which are import dependent may affect their cost of production,and hence cash flow situation and profitability, unless sales prices adjustment are possible within the local market condition.
In economic terms, companies that are export oriented will benefit more with the Ringgit devaluation, and this is especially true if their input raw materials are from local resources.
On the other hand companies that are majorly dependent on local market will not benefit from the Ringgit devaluation, but will be affected should their raw materials are imported.
In the light of the NAP 2014, promoting exports activities by the local automotive players and encouraging their development and employment of locally available raw materials and tool making capability are among the priorities.
These may ensure their ability to face future challenges should Ringgit devaluation may at any time ensue.

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